SINGAPORE: With just about one month to go before a crucial vote on its restructuring plan, embattled water treatment firm Hyflux has found itself served with a notice of default by local authorities – the latest complication to an already-challenging restructuring journey, said observers.
PUB on Tuesday (Mar 5) said it has issued a default notice to Hyflux’s wholly-owned subsidiary Tuaspring Pte Ltd (TPL) for not fulfilling various contractual obligations, such as keeping Singapore’s largest desalination plant “reliably operational”, under a 25-year water purchase agreement.
When pressed for details, the national water agency would only say that Tuaspring “failed to provide plant capacity as required on multiple occasions”. It declined to say more, citing “confidentiality obligations”.
“PUB has been in talks with TPL regarding its defaults all this while,” a spokesperson told Channel NewsAsia on Thursday. “As much as possible, we have allowed TPL time to resolve its operational and financial defaults but our concerns have been growing.”
DEEPER TROUBLED WATERS?
The default notice, while not exactly unexpected, poses “huge implications” for Hyflux’s restructuring, said the president of the Securities Investors Association Singapore (SIAS).
“It is not a surprise because the company is now clearly insolvent,” said Mr David Gerald.
Hyflux's latest financial accounts showed net liabilities of S$136 million for the first nine months of 2018, after taking a hefty S$916 million impairment on the carrying value of Tuaspring and other project receivables.
Given that the end of 30-day default cure period falls on the same day as the creditors’ meetings on Apr 5, the SIAS chief sees PUB’s notice as an “ultimatum” for Hyflux to get its scheme passed.
“I don’t know if it’s a coincidence but only with approval from the shareholders then can the company go back to PUB to say it now has S$530 million on the table and it can continue with Tuaspring.”
“If restructuring fails and Tuaspring is taken over by PUB, the company will be in dire straits because the white knight will walk away and there are no other white knights in sight,” added Mr Gerald. “It is now all in the hands of the investors.”
READ: PUB issues default notice to Hyflux's Tuaspring, says will take over plant if defaults not resolved
Analysts from OCBC Credit Research described it as “a complication as it comes at a difficult time in the restructuring process”.
“Now Hyflux has to deal not only with creditors under the scheme arrangement (and) creditors at the asset level, but also PUB to ensure the overall restructuring can be completed.”
One complication could be how Maybank – Tuaspring’s sole secured lender – would react given that its recovery values have become increasingly uncertain with PUB’s warning to take over the plant if the defaults are not addressed in time.
For retail investors, analysts said this latest development has stirred up more uncertainties but also serves as a “reality check”.
“(It shows that) actions by the Government will be ultimately driven by the terms of existing agreements, and equity value post-restructuring is likely to be minimal.”
But OCBC’s analysts have a different take when it comes to whether Hyflux must get its rescue plan passed during the scheme meeting.
“Not necessarily,” they replied, while referring to Hyflux’s SGX filing on Tuesday which stated that the default cure period is until Apr 5 “or such longer period as may be reasonable … for Tuaspring to consult with PUB”.
It may also take a few days for the voting results to be made available, analysts added.
MOUNTING INVESTOR ANGST
Knee deep in debt of almost S$3 billion, Hyflux embarked on a restructuring exercise last May.
By October, it announced a S$530 million lifeline from SM Investments – a consortium made up of Indonesian conglomerate Salim Group and energy giant Medco Group.
To make way for that, it has proposed a restructuring plan offering its junior creditors with perpetual securities and preference shares a recovery rate of 10.7 per cent. Senior unsecured creditors, such as medium-term noteholders, will get back at least 24.6 per cent.
This prospect of massive losses did not go down well among the holders of perpetual securities and preference shares – a large group of 34,000 mom-and-pop investors, including some retirees.
READ: Hyflux lays out restructuring plan to revitalise business, but retail investors lament big losses
As they grew increasingly vocal with their grievances, a group of perpetual securities and preference shareholders have started a petition asking for the Government to take back the Tuaspring plant at “fair asset value”. It has attracted more than 2,000 backers online thus far.
This will not constitute a bailout, the petition said, as the integrated plant is a “strategic” asset.
Petitioners also reasoned that policies governing the local power market have contributed to the plant’s losses over the years and in turn, Hyflux's financial woes. The need for authorities’ approval has also restricted the number of potential buyers for Tuaspring and “artificially depressed” bids.
When asked for a response to the petition, PUB said it needs to safeguard Singapore’s water security and due diligence was undertaken to "ascertain that the potential bidders have the technical and financial capabilities necessary to operate both the desalination and electricity generation components of the plant".
It reiterated that the default notice was issued due to growing concerns about Tuaspring's ability to keep the plant "reliably operational" and the lack of financial evidence to show its ability to keep the plant running for the next six months.
On SIAS’s part, it has tabled an alternative proposal urging Hyflux to give its minority stakeholders “a little more”. Mr Gerald said he remains hopeful that Hyflux will respond by tomorrow’s deadline.
Before the vote on Apr 5, Hyflux is set to meet its retail stakeholders next week. This third round of town hall meeting will start at 7pm on Mar 13 in the Hyflux Innovation Centre’s multi-purpose hall.
But this time round, SIAS will not be playing moderator.
“We have been doing our own independent town halls,” Mr Gerald told Channel NewsAsia, referring to the investor-only meetings SIAS has organised last month.
“So it’s best to let the company face the people now.”